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Fiscal Rules and Discretion in a World Economy

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  • Marina Halac
  • Pierre Yared

Abstract

Governments are present-biased toward spending. Fiscal rules are deficit limits that trade off commitment to not overspend and flexibility to react to shocks. We compare coordinated rules – chosen jointly by a group of countries – to uncoordinated rules. If governments' present bias is small, coordinated rules are tighter than uncoordinated rules: individual countries do not internalize the redistributive effect of interest rates. However, if the bias is large, coordinated rules are slacker: countries do not internalize the disciplining effect of interest rates. Surplus limits enhance welfare, and increased savings by some countries or outside economies can hurt the rest.

Suggested Citation

  • Marina Halac & Pierre Yared, 2015. "Fiscal Rules and Discretion in a World Economy," NBER Working Papers 21492, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21492
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    References listed on IDEAS

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    1. Azzimonti, Marina & Battaglini, Marco & Coate, Stephen, 2016. "The costs and benefits of balanced budget rules: Lessons from a political economy model of fiscal policy," Journal of Public Economics, Elsevier, vol. 136(C), pages 45-61.
    2. Marina Halac & Pierre Yared, 2014. "Fiscal Rules and Discretion Under Persistent Shocks," Econometrica, Econometric Society, vol. 82, pages 1557-1614, September.
    3. Andrew Atkeson & Robert E. Lucas, 1992. "On Efficient Distribution With Private Information," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 427-453.
    4. Alberto Alesina & Guido Tabellini, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 403-414.
    5. Alessandro Lizzeri, 1999. "Budget Deficits and Redistributive Politics," Review of Economic Studies, Oxford University Press, vol. 66(4), pages 909-928.
    6. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August.
    7. Robert J. Barro, 1999. "Ramsey Meets Laibson in the Neoclassical Growth Model," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1125-1152.
    8. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
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    Cited by:

    1. Azzimonti, Marina & Battaglini, Marco & Coate, Stephen, 2016. "The costs and benefits of balanced budget rules: Lessons from a political economy model of fiscal policy," Journal of Public Economics, Elsevier, vol. 136(C), pages 45-61.
    2. repec:eee:macchp:v2-2599 is not listed on IDEAS
    3. Alberto Alesina & Andrea Passalacqua, 2015. "The Political Economy of Government Debt," NBER Working Papers 21821, National Bureau of Economic Research, Inc.
    4. Cunha, Alexandre B. & Ornelas, Emanuel, 2017. "The Limits of Political Compromise: Debt Ceilings and Political Turnover," CEPR Discussion Papers 11945, C.E.P.R. Discussion Papers.
    5. Karakas, Leyla D., 2016. "Political turnover and the accumulation of democratic capital," European Journal of Political Economy, Elsevier, vol. 44(C), pages 195-213.

    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H1 - Public Economics - - Structure and Scope of Government
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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